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Going extinct: why corporate giants die

The average company lifespan has shrunk to 17 years – and even the most successful firms can succumb

By Nandu Nandkishore and James Michael Lafferty 19 October 2018

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Who wants to live for ever? For those of us who don’t, a long, healthy life – of 90 years, say – is enough. In the mid-1920s, 90 years happened to be the average lifespan of a leading company. Ninety years for us, 90 years for our companies: a neat mirroring of our own existence in what we made manifest in the world.

By the 1950s, the average company lifespan was down to 60 years. Today, it is a mere 17 years. Why are our companies dying young?

Take Kodak – founded in 1888, ubiquitous in the 1970s and 1980s. The former photography giant declared bankruptcy in 2012. Kodak had decided to cling on to the film-and-paper business model in the throes of the biggest ever disruption to its industry: digital. Incredibly, Kodak invented digital photography in the first place. They even set up a separate division to drive it. But they said it couldn’t be monetised and hoped it would go away. Kodak is one of the best examples of what happens to a corporation if it refuses to change with the world around it.

We’ve noticed a four-stage pattern in the lives of companies that cuts across all sectors and industries. Even the most successful megaliths of the corporate world are not immune from its pull. In fact, many of them exemplify it.

Stage 1: The maverick founder


Every famous corporation has a legendary founder. A maverick who knew what the people of the time needed and how to give it to them in a way that revolutionised their whole industry. Look at Ray Kroc, who founded not just McDonalds but the whole concept of takeaway food. Or Anita Roddick, who founded the world’s first ethical cosmetics megabrand, the Body Shop. People like them go down in history. But who is creating history today?

"Kodak is one of the best examples of what happens to a corporation if it refuses to change with the world around it."

Wellness is now one of the fastest-growing global industries, as identified by Gallup. But the golden age of the mega-brand is waning. The fastest growing wellness companies are not mega-brands. They are start-ups, quite often founded by people with absolutely no background in business. The Hollywood star Jessica Alba has had astronomical success with The Honest Company, which did what no mega-brand was doing: it cornered the market for organic bath and beauty products for the whole family. Mass brands are made with chemicals. All of them were ignoring what young, middle-class American families wanted. Alba leveraged her name, e-commerce and niche positioning to win $1.7 billion (£1.3 million) in 2017.

For millennials, everything has to be moving. It has to be new, and it has to make them feel special. That happens with allegiance to an array of diverse brands, not one big brand with one big, constant image. They don’t want to be just one identikit consumer in an amorphous mass of people, they want to be an individual. Big business is too corporate, too socially irresponsible and too global.

Stage 2: Going global


Nearly every successful company went through a stage 1 at its conception. But stage 2 is more complicated. To scale up internationally, you need patience, consistent effort with little immediate payoff, and a lot of discipline. The big brands of the 1980s did this with aplomb. It took 20 years or more, but brands like Unilever, Nestle, Coca-Cola and P&G dominated the planet until the 1990s when East Asian countries started to create fast-growing markets and easy access to finance. Strong local competitors began to emerge: Asia Pulp and Paper and the Wings group in Indonesia; Nirma in India; URC and Lucky Me in the Philippines; and many others.

When competition for market share emerges, margins are under pressure from the companies who are willing to accept lower returns.

Stage 3: Competition bites


As growth slows, investors and analysts demand higher earnings per share. There are only three ways to do that: price up, sell more, or reduce costs.

Pricing up prices your product out of the market, and selling more in the midst of slowing growth is a contradiction in terms. So we strip costs. Which might be okay, were it not for the new competitors who show up at this stage. Tech savvy, innovative and nimble, these impostors tend to create, occupy and grow niches the established brand deemed insignificant or fantastical.

Today, they tend to be organic, natural and/or socially responsible. Take a look at Nakd bars – the £31 million company making sweet sticky snacks for the health conscious – which in 2015 became the UK’s number one ‘single’ snack bar and has remained there since, growing 45% year-on-year. In 2016, Nakd – whose bars and nibbles are made from 100% natural ingredients with no preservatives, additives or sugar – sponsored Veganuary: a global awareness month created to encourage a switch to plant-based wholefoods.

Stage 4: Distraction


When the returns initially gained from squeezing value begin to peter out, the giant dinosaur crashes to the ground. Not before, however, a dazzling show of financial manoeuvring by the hangers-on. They want to improve shareholder value but the best they can do is wave and shout in an attempt to distract those watching from the grim reality. Maybe they move revenue to a lower-tax jurisdiction, or sell off one part and buy another, all in an effort to construct a story for the analysts. It’s the dance of a dying man.

These four stages of corporate evolution are not inevitable, but they are usual. Innovative and brave pioneers found a company. It becomes so successful that the only place to go is out: to the rest of the world. The world is finite, so there comes a time when profits plateau, or fall. Then comes the cutting of costs to maintain profit growth. Eventually profits dip anyway – usually due in part to savvier kids on the block – and the only card the established old-timer has left to play is a few financial dance moves to silence the hovering analysts.

Each stage requires a different strategy, and different managers and leaders. The managers and leaders are assessed within each stage according to how well their talents are suited to it. In other words, the creativity and bravery needed for the initial stage then rejected in the second stage, which is all about bureaucracy, internal politics and towing the line. There are simply too many codes, both written and unwritten, for true innovation to happen.

When growth slows, a stage ends. And eventually, these companies all end up in the same place: the scrap-heap of stage 4. There are three trends that push them there.

1.    A tired business model


Thirty years ago P&G knew toothpaste. Gleem made your teeth whiter, and Crest prevented cavities. Having two brands in one category worked: P&G had more than two brands in many categories. If they wanted to cover different consumer benefits, they brought in a new brand. But marketing costs rocketed and large retailers like Walmart – who now called the shots – found it easier to support mega-brands. And so Gleem became ‘Crest Whitening’.

The 1990s and early 2000s were the age of the mega-brands. Niche brands didn’t have the scale to get on the shelves of the massive supermarkets. That didn’t mean that customers didn’t want niche brands, it just meant they weren’t available. But not for long.

2.    Ecommerce: it won’t go away


You don’t need volume to achieve scale any more. Got a product idea? Launch it on Amazon or Etsy and away you go. Today, the megabrands need to watch their backs. Anyone can be a serious competitor. And, consumers can get what they want and need instead of being forced to buy megabrands through lack of choice. The megabrands simply can’t ‘do’ niche. Only a year ago P&G sold off all their niche beauty brands to Coty, sticking to what they know best but missing out on an opportunity for growth. There is no doubt that right now, niche is simply where it’s at. Sure, if you ask Walmart who their best suppliers are P&G is still somewhere at the top. But ask Amazon – who are predicted to reach over five percent of total US retail sales in 2018 – and they will list a number of niche players the bigwigs at P&G haven’t even heard of.

3.    Mavericks as mandatory


Without mavericks, there is no innovation. It’s that simple. Companies need people who see things differently, push boundaries and take risks. They might make people feel uncomfortable, but that’s the whole point. Without discomfort there is no progress. You can’t innovate by appointing a Chief Innovation Officer or making a plan. It has to be enmeshed in the culture of the organisation, and the only way to do that is to scatter them strategically throughout it. Mavericks at the most senior levels inspire those below them to use their difference to transform and create. If you don’t fit in and offend some people – all the better.

In the 1980s, P&G and Nestle had a good smattering of mavericks. People would clamour around them, keen to feed off their energy. But because they didn’t conform, others tried to push them out. Mavericks need to be protected. Smart leaders know this. The evaluative systems of today – where success is based on conforming to a standard set of principles – don’t treat them well. Once the millennium kicked in, mavericks everywhere started to go the same way as the woolly mammoth.

Today neither P&G nor Nestle has had a breakthrough innovation in over twenty years. Their leaders are both talented and inspirational but a company without mavericks is like a curry without cumin. It doesn’t matter how good the meat is: without seasoning and sauce it’s a different dish entirely.

"Without discomfort there is no progress. You can’t innovate by appointing a Chief Innovation Officer or making a plan. It has to be enmeshed in the culture of the organisation."

Most FMCG giants are now in stage 4. Embroiled in financial choreography, “nothing to see here” messages are being sent across the globe to keep analysts off the scent of death. And death is the only place to go after stage 4, unless they can do the following:

•    Embrace mavericks. Start with your culture
•    Restructure to create, small, niche, independent business units where ideas can
      bloom. Protect these units from interference.
•    Stop shareholder buy-backs – which do nothing but artificially boost earnings
      per share (EPS) – and re-invest into innovative business models instead.
•    Stop letting analysts drive strategy. Manage the expectations of investors as the
      company moves into a new phase. Take a long view.

It’s not easy to make such radical changes. But it is necessary. Companies need to make conscious, yet painful choices if they are to survive. But imagine the exhilaration when your breakthrough innovations create real and lasting success. You need the right kind of mavericks to shake things up, turn them upside down and jump all over them before genuine transformation will happen.

Corporate cultures are insular. Mavericks are unpredictable and zany. They don’t play it safe: They are the backbone of innovation. Forget that at your peril.

Make the leap from innovation aspiration to reality

Comments (2)

Andrew Baker 1 months ago

This is a terrible article. Opinionated and evidence free. How did LBS agree to publish it?

rickybaizas 1 months and 25 days ago

I suggest you read "Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages" by Carlota Perez. https://www.amazon.com/Technological-Revolutions-Financial-Capital-Dynamics/dp/1843763311

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